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Using The Bank Stocks As Your Crystal Ball

|Includes: BAC, C, GS, JPMorgan Chase & Co. (JPM), WFC

The bank stocks continue to be the leading indicator for any sustainable move in the stock market. Looking back to the beginning of 2011, stocks like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC) all put in their yearly highs within the first couple months of the year. This was months before the S&P 500 had topped out on May 2nd, 2011. Their top was a clear leading indicator of the market top that was soon to follow. Bank of America has dropped more than 50% from its yearly highs and others have fallen almost as much.

To understand why the financial stocks are the leading indicator of the U.S. markets one must note the major default issues in Europe. The U.S banks have exposure to some of the debt through derivatives and other means. In addition, any mass problems in Europe are now a global issue. Any lack of recovery or further slowdown in the world, only goes further to hurt the housing market in the U.S. This means more defaults and more problems for the banks. The issues go far deeper but let's keep it as simple as possible.

On a short term basis yesterday was a great example of the bank stocks leading the market. Yesterday, the markets were in panic mode over Europe once again. However, the bank stocks were surprisingly strong. Even the weakest of the group, Bank of America was flat to positive a good portion of the day when the markets were down sharply. Sure enough, the markets turned around and closed with a move higher.

Again today, the bank stocks are strong. Sure enough, the markets are higher.

Gareth Soloway